Yesterday afternoon the U.S. District Court for the Eastern District of Texas, in a case styled Texas Top Cop Shop, Inc. v. Garland, issued a preliminary injunction against the enforcement of the Corporate Transparency Act (the “CTA”). Unlike the injunction issued in the National Small Business United decision, which injunction benefited only the members of that trade association, the injunction issued yesterday applies nationwide in favor of every company obligated to file beneficial ownership information reports with the Financial Crimes Enforcement Network (“FinCEN”).
The opinion runs to 79 pages, much of which is devoted to the question of standing (had the plaintiffs demonstrated they would be injured absent an injunction) and the interpretation of the Commerce Clause, the provision of the Constitution that authorizes Congress to regulate interstate commerce. Suffice to say the court found:
- the plaintiffs had standing because of the compliance costs they would incur absent an injunction would not be recoverable if the CTA were struck-down after they had filed the reports required by the CTA; and
- the Commerce Clause does not extend to regulating the mere existence of corporations, limited liability companies and other business entities subject to its requirements.
As to the preliminary injunction that was issued, “The Court determines that the injunction should apply nationwide.” Further, “Just as the injunction against enforcement of the CTA should apply nationwide, a stay of the Reporting Rule should apply nationwide.” This means in substance that reporting companies (corporations, LLCs, etc.), irrespective of when created, are not subject to an obligation to file and update beneficial ownership reports and are not subject to any of the CTA’s penalty provisions.
So the CTA is dead? Well, not quite. This preliminary injunction decision was rendered before a trial on the merits. That trial may still take place, and it is possible that thereafter the court will determine, having had the benefit of a full range of evidence and testimony, that the CTA is constitutional, at which point the preliminary injunction would be reversed. Further, FinCEN may appeal this decision to the Fifth Circuit Court of Appeals. It would not be surprising for FinCEN to request that the Fifth Circuit (or even the U.S. Supreme Court) either restrict the scope of the preliminary injunction to only the parties to this lawsuit, which would include the members of the National Federation of Independent Business (“NFIB”) or stay enforcement of the injunction so that the January 1, 2025 deadline would remain in place. Whether that will actually be a basis of appeal, and what the Fifth Circuit Court of Appeals or Supreme Court’s reaction there would be, is at this time unknowable. Further, we would expect FinCEN to ask the Court of Appeals to reverse the determination that the Commerce Clause does not empower Congress to adopt the CTA.
SKO is going to continue carefully monitoring the situation. For now, efforts to complete CTA filings by the end of the year may be put on hold with the caveat that another court ruling could potentially put us back on track to a “before January 1, 2025” deadline. For that reason it may be best to continue with your efforts to collect the necessary information so that if there is a change in circumstances we can promptly proceed forward. If we could be more certain we would be – unfortunately the state of the law allows us no greater certainty.
